4 - Options - Option Chains I

Option chains have a ton of information. Much of this information you will need when making your decision of whether or not you want to trade a particular option. Look at the option chain graphic below. For our example, we'll use options on IBM for the month of April.

April is not the only month options are offered for IBM. Similar chains are available for May, July, and October – plus longer term options (called LEAPS) for January, 2011 and January, 2012. For now, we'll be focusing on the April, 2006 option chain.

As you can probably see, a chain is divided into to two sections. Information on the pricing of “call” options is on the left while the “put” option pricing is on the right. Separating these two sides is a column labeled “Strike.” This column has a list of the different strike prices that are available for IBM. Each stock will have its own list of available strike prices, depending on where the stock is trading.

Let's check out the column headings so you'll have an idea of what you're looking at. Much of this information is important, while some is not. Let's go from left to right.

Option Symbol (Symbol)
Every single option has a specific symbol. It used to be pretty easy to construct the symbol for each option and it was useful when placing the order. However, recently things have changed and it is no longer necessary to know the specific option symbol in order to place your orders.

Hopefully, your broker's trading platform will allow you to easily select the strike and date of the option you want without having to reference the actual option symbol.

Last Price (Last)
This number reflects the last price at which this option was traded. Is this price important? NO. Why not? Because it's not necessarily an accurate representation of the value of the option. One doesn't know when the last trade took place. The last trade could have been two minutes ago or two hours ago. As you know, the price of an option moves up or down in relation to the movement of the stock.

Look again at our graphic. The $80 call shows the last trade as being at $4.70. When was that trade made? We don't know. You can get a clue by looking at the “Volume” (Vol) column. That tells you that there were absolutely none of the $80 calls traded this day. So, the $4.70 “last trade” must have taken place sometime earlier. And, we have no idea where IBM was trading when that trade was made. It could have been trading at $82 or $83 or $84. We simply don't know.

So, how do you know the true value of an option? You look at the current “bid” and “ask.”

Change (Chg)
This is another bit of useless information – at least I haven't found any use for it in the last 12 years. Why? It's old news and based on the change of the last trade from the previous last trade. I suppose they wouldn't bother calculating it unless it meant something to somebody, but it escapes me. If you can find a use for it, good for you. There are more important things to think about – like food, sex, and sports (not necessarily in that order).

Bid Price (Bid)
OK. Now we're getting to the good stuff. Those of you have traded stocks before know that the “bid” price is what you can expect to get if you want to sell your shares. It's the same with options. If you owned a contract of the $80 IBM calls, you could sell it immediately at $5.10/share ($510 per contract). The “bid” price reflects an accurate reading of the value of the $80 call at that particular point in time. Remember, if IBM goes up $.30, the “bid” price will likely change. So, when you pull up a snapshot quote (like our graphic), the price is valid for that moment in time.

Ask Price (Ask)
The “ask” price is simply how much the market is currently asking for should you want to purchase the option. In our example, you would pay $5.20/share ($520 per contract) to purchase the April $80 IBM option. Again, this is a snapshot in time and the $5.20 price will move up or down as IBM stock moves up and down.

Since the “bid” and “ask” prices are constantly changing with the upward and downward movement of the stock, it's nice to have a data source that provides you with streaming quotes. Many brokerage firms offer real time streaming quotes as part of their trading platform – and it should be FREE!!

Streaming quotes will instantly change and makes your trading life easier. Why? Because you don't want to have to keep requesting snapshot quotes every 30 seconds to get an accurate reading on the value of the option you're considering trading.

A key phrase here is “real time.” Many data services offer you free “15 minute delayed” quotes – a perfect example of more useless information. Who knows where the hell IBM was trading 15 minutes ago? Not me. And it's certainly not worth the effort to try and figure it out – because we're only concerned with the CURRENT value when we're making our trading decisions.

Next Time
We'll dig further into the “option chain” in our next article.

This Is Good Stuff
Just a reminder that, if you're new to options, these basic articles are valuable. Print these articles out so you can reference them at your leisure. This is your bible for the options basics. It's information you need to know before you risk your hard earned dead presidents – and it may very well become a collector's item. What better reasons can there be?

(If you have any questions, feel free to email Mike at: mikeparnos@comcast.net)